11 February 2012

Many countries have contributed to Afghanistan’s reconstruction. But it’s only been since 2007 that China has attracted attention with its investments. In November 2007, the Metallurgical Corporation of China (MCC) won the tender to invest over $2.9 billion to develop the Aynak copper mine, which is the second-largest copper deposit in the world

This was not only the second-largest investment in Afghanistan in recent years – equivalent to one-third of all foreign aid spent in the country between 2002 and 2007 – but it also raised China to the top tier of investors. In a more recent deal in October 2011, the PetroChina Company Ltd (CPNC) plans to invest about $300 million in three oil fields in northern Afghanistan.

As China becomes more and more concerned about the impact of the power vacuum created by the imminent U.S. withdrawal, it has begun to accompany its economic investments with contributions on the security side as well. Although China has sent its Snow Leopard Special Operation forces to protect its most important assets (such as the Chinese embassy) and personnel in this unstable region, the number of guards is very limited. Many more Chinese workers and businesses rely on the International Security Assistance Force and U.S. security contractors for protection. As a consequence, the United States and China, which have developed a competitive relationship around resource extraction around the world, might find common ground for cooperation in Afghanistan.

Whether China becomes more active in Afghanistan to protect its investments security depends on the scale of Chinese involvement and the priority of Afghanistan in China’s regional strategy. At a time of rising tensions between Beijing and Washington, cooperation around Afghanistan could be a win-win for all concerned.

Jewel in China’s Crown?

After the Soviet Union's collapse in 1991, China increased its foreign engagement with its western neighbors in Central Asia and South Asia. It established and operated regional political, military, and economic cooperation mechanisms with Russia and the five Central Asia countries beginning in 1995. It also re-balanced its position between India and Pakistan, deepening its relations with India, the rising regional great power. After adopting a "Western Development" policy in 2000, Beijing has been constructing an energy transit network and consolidating defense in its western provinces, especially in Xinjiang and Tibet.

Besides its unique strategic position, Afghanistan's less known feature, its abundant mineral resources, is very attractive to resource-hungry China. China has become the second-largest net oil importer in the world since 2009. According to an International Energy Agency scenario, Chinese oil imports are estimated to grow from 4.3 million barrels a day in 2009 to 12.8 million barrels a day in 2035, rising from 53 percent to 84 percent of its total demand. It is also dependent on foreign imports of copper and iron for 80 percent and 53.6 percent of its needs respectively, and its consumption will grow by 5-10 percent per year in the future.

In 1960s and 1970s, Soviet geological exploration revealed numerous mineral reserves in Afghanistan. After 2001, the U.S. Geological Survey updated these findings and estimated that the untapped mineral deposits are worth $1 trillion.

Three kinds of resources are most valuable to China. Deposits in the Aynak region contain about 240 million metric tons of copper, one of the largest copper reserves in the world.

The largest iron deposit in the country, meanwhile, is the Hajigak deposit. The region contains 1.8 billion tons of iron ore, an enormous amount of which is world-class quality. Finally, most crude oil occurs in the Afghan-Tajik Basin, and most of the natural gas is located in the Amu Darya Basin. The estimated mean volumes of petroleum were 1,596 million barrels of crude oil, 444 billion cubic meters of natural gas, and 562 million barrels of natural gas liquid. On top of these traditional resources, U.S. surveyors recently discovered a rare earth element reserve with at least 1 million metric tons of lanthanum, cerium, and neodymium in the Khanneshin area of Helmand province.

The Drivers of China's Involvement

After the U.S. invasion in 2001, Beijing reestablished official diplomatic contact with the Transitional Authority and provided over $200 million in foreign assistance. Chinese state companies have conducted seven infrastructure construction projects, including important highways in Kondoz (2003-2005) and in Jalalabad (2003-2006). A province-owned enterprise helped to rebuild the water conservancy in Parvan in 2004. The twin telecom giants, Huawei and ZETA, also won some contracts of reconstructing and maintenance of the telecom systems in Kabul and Kandahar. These early contracts were at a relatively low scale, and Chinese firms followed their government’s foreign aid policy rather than their own economic interests. In bilateral trade, the total amount has increased 40-fold since 1999 to $716 million in 2011, but it is a one-sided exchange. Chinese exports of manufactured goods flood the Afghan local market, but China only imports about $12 million (about 1 percent of the total amount).

China so far has devoted most its energy and money to the Aynak Copper mine located in Logar Province, 30 miles south of Kabul. According to the contract, MCC will build a complete production line of exploitation, concentration, and smelting, as well as a 400-megawatt power plant, vital transport infrastructure (probably the railway linking Afghanistan to Tajikistan), and social amenities (schools, clinics, and mosques) for the local communities. It is scheduled to begin operations around 2012 and 2013. The U.S. Institute of Peace (USIP) estimates the annual 19-percent royalties can bring an average $300-million annual income to the Afghan government and shift the focus of the Afghan economy away from the opium trade. It will create 5,000 direct and 30,000 indirect jobs. Both Kabul and the international community see this long-term investment as vital to Afghan reconstruction and development.

Another important energy contract, CPNC's $300-million oil exploitation project, concerns northern Afghanistan. The three oil fields in Zamarudsay, Bazarkhami, and Kashkari, which contain a total of 88 million barrels, are adjacent to Turkmenistan and Uzbekistan. Little is known about the terms of the contract, but the investment will include a production facility and a transport network (pipeline). Considering the low population in the region, there will be less local development of infrastructure investment than in Aynak.

These two investments comprise over 90 percent of Chinese FDI in Afghanistan. But this Chinese FDI amounts to little over 10 percent of the total FDI flowing into Afghanistan.

Emerging Security Concerns

Because of the Taliban’s resurgence, it now operates in 80 percent of the country, including the provinces in the west and north. The number of violent incidents began to increase in 2009 and reached a high in 2010. Most attacks targeted the local population and the security forces. Personnel connected to investment, business, and infrastructure projects have experienced a low incidence of violence. Nor is it evident that the Taliban and other Islamic extremists have specifically targeted Chinese. In 2004, in the only reported attack in Afghanistan that specifically targeted Chinese, militants killed 11 Chinese employees working on a Jalalabad highway project. The Aynak copper project is located in Logar province, a base for the Hizb-i-Islami Gulbuddin and the Haqqani Network. This makes the investment in Aynak more insecure compared to the oil project in Faryab and Sar-E Pol province of the northern Afghanistan.

Complicated tribal politics and rivalries also add uncertainty to China’s investment strategy. Although the central government in Kabul has welcomed Chinese investors and guaranteed their security, the Chinese still face complex tribal politics in local areas. Moreover, the Islamic Movement of Uzbekistan (IMU), which has a direct relationship with the East Turkestan Islamic Movement in China’s Xinjiang Uighur Autonomous Region, has set up camps in the two provinces to recruit and train Afghans. The IMU might instigate anti-Chinese sentiment and attack Chinese investments.

The primary security issue for Chinese business representatives is transportation of the extracted resources out of landlocked Afghanistan. Currently, there are two major transportation routes between China and Afghanistan: land transport from Kabul to Karachi, then by ship to China, or land transport from Kabul to Bandas Abbas, then by ship to China. For the Aynak cooper mine, both the southern (Kabul-Karachi) and the western (Kabul-Bandas Abbas) routes are practicable. However, both routes are expensive and time-consuming. The southern route also crosses through the unstable areas in eastern Afghanistan and northern Pakistan, where insurgent attacks are frequent. MCC plans to solve this transportation problem with a rail link between Afghanistan and Tajikistan. For the oil fields in the north, pipeline transit will be a much safer method than road/railway transportation. China can plug the new pipeline into the existing grand pipeline system in Central Asia, but this might involve further negotiation with neighboring Turkmenistan.

China's Central Asia Strategy

China has been actively participating in almost every issue in Central Asia since the 1990s. On one hand, this reflects China's rising in economic and political influence and military strength over the past two decades. On the other, China can’t avoid engaging in the region given Central Asia's strategic centrality in geopolitics.

Consider, for instance, the twin issues of separatism and terrorism in China’s troubled Xinjiang province. The tensions in the Xinjiang Uighur Autonomous Region are an important factor behind Beijing's eagerness to tie itself with Central Asia. In the 19th and 20th centuries, Uighurs and other Turkic ethnic groups made several failed attempts to establish an independent East Turkestan state. In addition to suppressing these rebels, China has also adopted special political, economic, social, and cultural policies to suppress the separatist sentiment, integrate local populations, and enhance their recognition within the PRC.

After the Central Asian states gained their independence in 1991, separatists gained popular sympathy both in the Central Asian states and in Turkey, reinforcing separatist sentiment. Poor governance in Central Asia not only enabled the smuggling of weapons and personnel across borders but also encouraged the emergence of Islamic extremism in the region, such as the IMU. What's more, the Central Asian Islamic extremist groups started to establish links with the Taliban and al-Qaeda in northern Afghanistan and Tajikistan. Some Uighur rebels and members of ETIM had received training both in al-Qaeda and IMU camps. In response, China used trade and investment as tools to pressure Central Asian countries to end their support of the Xinjiang separatists. It further initiated multilateral military cooperation against the "Three Evil Forces" (terrorism, separatism, and extremism) in the region within the Shanghai Cooperation Organization (SCO). China included Afghanistan as a guest observer in the SCO and expressed its concerns about anti-terrorism efforts in Afghanistan. In this sense, Afghanistan is a geographically peripheral but strategically integral component of Chinese anti-separatism and anti-terrorism strategy in Central Asia.

The second component of China's strategy in the broader Central Asian region involves energy. The increased international dependence on oil and gas, as well as China’s growing thirst, has sharpened competition over these fuels. At the same time, China has been diversifying its sources of energy in order to reduce its dependency on oil from Middle East. Given the fragility of the maritime supply line via the Indian Ocean and the Strait of Malacca in wartime, these factors make it more important to control Central Asia, as it is both a producer and a transit region. Therefore, China has pursued the exploitation rights of several oil and gas fields in Central Asia through bids and purchases, including two agreements with Kazakhstan for $5 billion in oil-field development and $9 billion in pipeline construction. Both countries recently signed an accord to expand a pipeline network by more than 80 percent in September 2011. Moreover, China's state-owned enterprises have also committed $100 to 120 billion to projects in Iran(mostly in its oil fields), despite the long-term sanctions by the United States and Europe. Although facing political and economic difficulties, the Sino-Iranian network of oil pipelines would be another most important transit line on the continent. As such, Chinese investment in Afghanistan oil fields is part of its overall resource diversification in the region.

An equally important geopolitical factor is how China’s further involvement in Afghanistan will affect stability in South Asia. The complicated interactions among Pakistan, India, and Afghanistan have produced a comparably complex policy in Beijing. China worries that Islamic extremists in Afghanistan and Pakistan influence not only Uighur separatism and security in Xinjiang, but also the effective governance of Pakistan, which is important for the further development of Sino-Indian relations. On the other hand, China realizes it cannot ignore Pakistan's sense of insecurity that has been heightened by more Indian involvement in Afghanistan. It also sees India as both a strong competitor for Afghan natural resources and an encircling external power (through Afghanistan). Beijing has thus used its engagement with Islamabad to balance New Delhi’s influence. China's higher profile at the Istanbul International Conference on Afghanistan in November reflects this approach.

Superpower Cooperation?

As the current great power in the region, the United States is the major variable influencing China's policy making. Traditionally the United States has had few critical interests in Central Asia and has seldom made the region a high priority, except when the Soviet Union invaded Afghanistan. During the 1990s, the only U.S. strategic interest in the region was the non-proliferation of nuclear weapons. Only after 9/11 did the United States turn its attention back to the region. Now with the announcement of its new Asia strategy in October, the White House is shifting its focus to the Asia-Pacific region. At the same time, Washington is not eager to see China expand its influence in Afghanistan and its environs.

From a strategic perspective, then, China does not want to attract too much attention with its grand strategy in Central Asia. The United States and India have been very concerned about the westward expansion of China’s influence into the Indian Ocean since 2006. They claim that China has a vision of a "string of pearls," trying to gain access to the Indian Ocean through strategic investments and military base constructions in Hainan Island, Cambodia, Burma, Sri Lanka, Maldives, and the Gwadar port in Pakistan. If China further increases its involvement, such as sending military personnel to protect its investments in Afghanistan or to help train Afghan security force, Washington will take notice.

Chinese economic interest in Afghanistan may not be as important as its interests in other countries. Its investment in Afghanistan represents only a tiny proportion of its total overseas investment stocks — $168.6 million out of $3.1 trillion — which is even lower than its investments in Sudan and other African countries. Moreover, China has been diversifying its acquisition of resources by making deals with many different countries around the world. It has also used mergers and acquisitions to secure stakes in mining, oil, and gas sectors.

Considering the importance of its investment security and Afghanistan's role in geopolitics, China will probably increase its involvement in Afghan issues alongside the gradual withdrawal of U.S. and NATO forces. However, traditional geopolitical, strategic, and economic factors greatly constrain China's ability to become more active in Afghanistan.

Many articles and statements in the Chinese press support Chinese cooperation with the United States on Afghanistan reconstruction. For instance, as far back as 2004, Men Honghua of the International Strategic Institute of the Central Party School discussed potential Sino-U.S. cooperation in failed states, including Afghanistan. According to a WikiLeaks cable, China has “expressed interest in cooperating with the U.S. for delivery of non-lethal aid to Afghanistan” since 2006. But the Chinese government formally rebuffed the possibility of military cooperation in Afghanistan—namely the opening of a supply route for U.S. forces—in 2009.

Particularly as U.S. involvement in the Afghanistan War decreases, U.S.-China cooperation can still go forward in the economic and cultural realms. China sends its workers to dangerous areas where U.S. personnel are reluctant to go for construction and other infrastructure projects. In a region of great conflict, the United States and China might eventually find greater common ground.